ASFMRA: Supply supports farmland market

“With the market dominated by buyers who plan on holding the asset for a very long time, the result is a market that’s frequently facing
limited supply.”

Supply. Sometimes it is the forgotten element when people discuss the farmland market. Rather, the focus is usually on demand.

Demand has drawn much of the attention the past few years because it has been unusually strong. That strength has been powered by several years of exceptional net farm income, especially for row-crop corn and soybean growers.

In addition, interest rates have been at record lows, which impacts demand two ways. First, financing costs for land purchases are greatly reduced. Second, alternative financial investments are far less attractive compared to the annual returns available from farmland ownership.

These factors combined to boost demand for farmland the past few years. But lack of supply has been a factor, too. Unlike housing, the farmland market has very few “flippers”—investors who purchase an asset with the intention of selling it for capital gains in a short period of time.

The large majority of farmland buyers are local farmers who buy farmland to expand their business. Selling the land a short-time later is not part of their business plan. When land moves into the hands of an operating farmer, it is removed from the market for, potentially, a long period of time—possibly as long as three generations.

Many of the non-farmer investors active in the farmland market view farmland ownership much the same way. They see the purchase as a long-term investment and an important stabilizing force in their portfolio of assets. For some, their investment horizon may be 10 to 15 years; for others, it may be an asset held for future generations.

With the market dominated by buyers who plan on holding the asset for a very long time, the result is a market that’s frequently facing limited supply. The main source of sales offerings is estate settlement. That’s why we’ve seen annual land turnover in some areas drop to as low as 1 percent to 1.5 percent—down from the 3 percent to 4 percent, which existed into the early 2000s.

How long this situation will continue is, of course, unclear. But we suspect this is a fundamental shift in the market that could persist for quite some time. If so, that continuing lack of supply will tend to support land values even when demand eases.

Farmland demand has not been as strong this spring and summer as we’ve experienced in recent years. The extremely difficult spring planting season followed by the late summer drought raised legitimate concerns among growers about yield prospects. Meanwhile commodity prices have fallen dramatically from levels seen last winter.

The combination of production uncertainty and lower commodity prices curtailed farmer buying interest, particularly in the western Corn Belt. As we’ve moved into the early stages of harvest, however, we’ve detected some re-building of confidence on the part of farmers.

The result is a land market that is somewhat fractured. Demand for top-quality ground in strong producing regions can be quite strong. But demand for lower-quality ground in areas suffering drought damage can be quite weak. Whether you’re in the market to buy or sell farmland, understanding soil qualities and local growing conditions is more critical than ever. It’s in this type of fragmented market that the insight from professionals can prove invaluable.